If your sales are $1.9 billion, and you’re ending up with a loss of $12.6 million, all you have to do is optimize. Turn an extra 1% of your sales into profits, and you’re in the black.

$12.6 million is dwarfed by B&N’s assets and revenue

Here are a few things to consider –

B&N has current Assets of $2.1 billion.

B&N has property and equipment worth $756 million. Note that it’s $2.81 billion minus $2.1 billion in depreciation and amortization. That seems a bit strange – Property and equipment seems like it might be worth more than $756 million. There are 717 stores and over 600 college bookstores. How is that worth just $756 million?

Goodwill and intangible assets of over a billion dollars.

It also has current liabilities of $2 billion, long-term liabilities of $1.2 billion, and shareholder equity of $823 million.

We’ve already covered that it had sales of $1.9 billion in the last quarter.

Not an expert, but it seems that the $12.6 million in quarterly losses is hardly a concern given that B&N has $1.9 billion a quarter in sales, and at least a few billion in assets. This is a company that is unlikely to go under in 2011. In fact, it paid out a 25 cents dividend on December 31st, 2010.

Even B&N’s market capitalization of $823 million seems low. Low enough that buying it might be a steal – which would explain why everyone from Ronald Burkle to Borders’ main investor wants to buy it

B&N has a $1 billion revolving credit facility, with $627 million still available

From the earnings release –

At the end of the second quarter, the company had borrowings of approximately $377 million under its $1 billion revolving credit facility.

The company’s financial position remains strong and the revolving credit facility provides ample room for the company to fund its strategic investments.

$377 million in borrowings isn’t very reassuring. Still, it’s nice to know there’s still $627 million available. B&N is definitely set for 2011, and perhaps for quite a few years after that.

$12.6 milion is dwarfed by what B&N is doing in eReaders and eBooks

The really interesting aspect is what B&N is doing in eReaders and eBooks. Nook and Nook Color are B&N’s crown jewels, and quite possibly 90% of its future.

Here are some estimates and figures –

B&N expects digital content sales will hit a $400 million per year run rate by the end of fiscal 2011.

It’s the #2 eReader maker in the US.

It’s selling half a million Nook Colors a month.

B&N’s Nook and Nook Color business alone are worth a few billion. If Google decided to get serious about ebooks it would have to buy either B&N or Sony’s eReader division.

How much do you think B&N would sell its Nook division for?

Perhaps not at all. Perhaps for a few billion dollars.

B&N’s losses are due to investing heavily in Nook and Nook Color

B&N is seeing losses because it’s put a lot into Nook and Nook Color and into selling ebooks. It’s something it has to do to survive, and is also the smart thing to do – It can’t fight Kindle with physical books. It has, however, fought the Kindle reasonably well with Nook and Nook Color.

B&N mentions that it’s investing heavily in Nook and Nook Color and in ebooks, and that it will continue to do so –

The additional investments are expected to continue and peak during the second half of the year, and then increase moderately in the years ahead. Payoff for these expenses is estimated to begin to appear in the third quarter, when NOOKcolor is expected to be one of the world’s most sought after eReaders, …

B&N also said it had captured 20% of the ebook market. If it can increase this, the investment will be more than worth it.

B&N is investing heavily in the future of books, racking up some minor losses, and setting itself up for profitability in the future. It’s exactly the sort of thing you’d want a company to do – if you had invested in it for the long-term. It’s also exactly the sort of thing you’d hate – if you only cared about your year-end bonus, or were doing short-term trading.

Why would B&N be considering a possible sale of the company?

Not an expert, so please keep that in mind.

Let’s say you’re mining for copper, and you hit a vein of gold. You start to invest heavily in setting up the facilities to mine for gold.

Your investors go crazy. They don’t think the vein of gold means there’s actual gold – Also, even if there is, it won’t be arriving soon enough to meet their year-end goals from their investments. The way they see it – the profits from copper mining are going into building a gold mine, which isn’t going to pan out soon enough for it to be worthwhile to them. They’d rather get instant gratification and see the profits from copper mining go into their pockets.

So they hammer your perceived value. They start saying your mining business is done. Suddenly, its value is a quarter of what it should be.

What do you do?

Well, it’s a huge opportunity for you – You can kick out all these greedy investors, you can get total control of your company, and you can take your company private so no one knows just how much gold you’re making.

That, in my opinion, is what B&N is doing.

Lots of people feel B&N is just exiting the stock market

This thread at the Nook forum has a lot of people that think B&N just wants to get away from the joke that is the stock market.

Here’s a snippet of what flyingtoastr wrote –

BN has been investing heavily in digital strategy over the last twelve months. These short-term costs, while costing a lot in the short-term, will end up helping the company remain profitable, and even increase profits in the future.

BN’s move to put the company “for sale” is most likely a move simply to get the company off of the stock exchange and privately held.

IAmBrad also agrees –

Most likely if B&N is sold, it will be done so in a manner that uses either a buyer or buyers that bear a different name, but are actually funded by the current B&N structure.

B&N sees an opportunity to buy itself for a quarter of its real value. It also sees an opportunity to free itself of all the pains of the stock market – market manipulators, short-sighted investors, Sarabanes Oxley, and so forth. It’s a really smart move for B&N to try and buy itself and go private.

Nook and Nook Color are going to be fine. Even in the extremely unlikely case that B&N goes down – they support ePub, and you can switch to Kobo or Google eBooks.

14 Responses

I really like this web page and you have given accurate and timely advise regarding e books.

But you need to have someone who understands balance sheets and income statements help you before you speculate on the financial condition of BN or anyone else with financial challenges.. Ray Charles could conclude amazon is fine.

But going back to you last post, how much will a Samsung ereader hurt B&N? Of all the new entrants, that is the one I would watch. Samsung will make mistakes… but they have a record of aggressively entering volume electronics markets.

Amazon might have been brilliant delaying Samsung by a year. It might have only been six months… But with amazon ramping up to 4.5 million units for 1Q2011, even a few quarters delay of that level of competition might make the difference between market leader and 2nd place.

Amazon sold millions of K3s without Samsung having a US presence. What would it have been like if Samsung had an ereader and an application for the Galaxy tab?

It would have made life tougher on B&N too.
I’m going to watch to see what Samsung does in 2011 in the ereader market.

The past couple of years have been really rough on a cash flow basis. The last 12 months have seen a loss of $70 million in real cash.

Another quick indicator is the Altman-Z score, which sits at about 2.1. An Alt-Z score below 1.8 indicates a strong possibility of bankruptcy for a company, while above 2.6 is consider “safe.” So B&N is in the grey zone there.

As I said, I haven’t followed the company closely but it doesn’t appear to be in danger of going under in the near term. It’s not in great shape by any means, but it seems to me it still has a chance to get its act together.

If the growth of ebooks cuts sales of DTBs by 6% per year for the next several years, as seems likely to me, B&N will continue losing money, because it needs volume to cover its fixed retail-store costs. Closing its money-losing stores will impose large one-time costs–and the need to keep closing such stores may never end.

Property and equipment on the balance sheet does not, and is not meant to, reflect the value of the property and equipment. Generaly accepted accounting principles (GAAP) are the rules that are used for accounting in the United States. In general (and there are exceptions), GAAP rules are based upon the acquisition cost of the asset and nominal dollars.

In other words, the purchase cost of the property and equipment owned by B&N when purchased, without adjusting for changes in value of the dollar or the asset, is $2.81 billion dollars. (There are a lot of reasons why GAAP uses cost and nominal dollars, and I’m sure that there are all sorts of accounting discussion groups that accounting theory can be discussed on. This is not the place.)

So the other piece of the question is accumulated depreciation. The definition of depreciation used in GAAP is not the same definition that is used in common parlance. (I hope I spelled that right.) Depreciation is NOT the reduction in value that occurs over time to, say, a car. In other words, when someone says that a new car depreciates 25% in value when you drive it off the lot, they’re not using the GAAP definition of depreciation.

In GAAP, depreciation is defined as the systematic allocation of the cost of the asset over the life of the asset. In other words, if you buy something that costs $100,000 and has an expected life of 10 years, during the next ten years there will be a total of $100,000 in depreciation charged to the income statement for the asset. The easiest method of calculating depreciation is straight line, so (with a couple of assumptions thrown in), there will be $10,000 of depreciation “expense” on the income statement each year for the next ten years, and accumulated depreciation will increase by $10,000 for the next ten years.

For B&N, there has been a total of $2.1 billion in depreciation expense (cumulative) taken on the income statements due to the currently owned assets since the assets have been acquired.

As to what the assets are “worth,” that’s a much more interesting question. I doubt that the fixtures (book shelves, cash registers, etc.) are worth much different than the value on the financial statements. However, the buildings and land may be worth significantly more (or less) than the amount on the financial statement. But to realize that value, B&N will need to sell them. If they sell their stores, they may get a lot of cash right now, but their future revenues may drop significantly.

This is why a lot of financial analysis of company balance sheets tend to focus more on the current assets and liabilities, and only secondarily at the long term assets and liabilities. Property, plant and equipment is a long term asset.

And… it really doesn’t matter what a company’s assets are worth when you’re discussing the health of the business. General Motors had a lot of plants and equipment that were worth a lot of money, but it didn’t matter because the business couldn’t survive in relation to how much cash it could make and how much it owed creditors, etc. It went bankrupt, shareholders were wiped out, and now there’s a new GM.

Samsung just went insane and inserted checksums throughout the latest ROM for the Galaxy Tab. This will make rooting and other customizations impossible. Should B&N get that idea for NookColor, sales of that device will plummet. Never underestimate B&N’s ability to seriously wound itself. It already did it by mutating the Adobe DRM everyone else was using.